The problem with buying off-plan
A number of recent and well publicised failures in the market for “off-plan” properties have highlighted how important it is for buyers to be aware of the risks involved in an investment which usually promises large capital growth and/or a guaranteed income scheme.
A case which came before the High Court a couple of years ago involved the development of an eight-storey block of over a hundred “student suites” in Nottingham. The development was sold entirely off-plan to investors who were resident abroad in China, Dubai, Hong Kong and similar far flung destinations. Each investor entered into an agreement for lease and paid 50% of the purchase price on exchange of contracts. The developer of the site received total deposits of just over £3million.
Following relatively standard procedure, each investor entered a unilateral notice at the Land Registry to protect their contract. Unfortunately, development of the site did not get beyond the demolition of the existing buildings before the company was placed into creditors’ voluntary liquidation.
The initial dispute considered by the High Court required a determination of whether the investors’ unilateral notices could be removed to enable a sale of the site to take place, given that a purchaser had been found at a price of just over £1million. A sale at this level meant that the investors would realise a deficit of almost £2million.
The crux of the issue was that if the investors’ registrations could be lawfully maintained, then they would effectively be secured creditors and would be reimbursed from the sale of the development site. If not, then they would simply be unsecured creditors in the liquidation of the company, and would probably end up with very little.
The Court did not actually come to a decision on the main issue, but a compromise was reached to allow the sale of the site with the dispute to proceed at a later date. The sale proceeds were protected in the meantime and, if the case does proceed, the interests of the general unsecured creditors of the company will also need to be considered.
This case serves as a timely reminder that “off-plan” purchase deposits should be treated with caution. In addition, any potential investor in an “off-plan” development should ensure that they research the developer in question, and check whether the developer is financially sound. Independent professional advice is strongly recommended.
This article previously appeared in the East Anglian Daily Times 23rd May 2018.
Andrew Nicholson is Managing Partner and head of the property team at Barker Gotelee Solicitors in Suffolk
Suffolk Property Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email [email protected]
